Thoughts on the World Economic Crisis

If there is one thing that can give a layman in the sphere of economics the
courage to express an opinion on the nature of the alarming economic
difficulties of the present day, it is the hopeless confusion of opinions among
the experts. What I have to say is nothing new and does not pretend to be
anything more than the opinion of an independent and honest man who,
unburdened by class or national prejudices, desires nothing but the good of
humanity and the most harmonious possible scheme of human existence. If in
what follows I write as if I were clear about certain things and sure of the truth of what I am saying, this is done merely for the sake of an easier mode of expression; it does not proceed from unwarranted self-confidence or a belief in the infallibility of my somewhat simple intellectual conception of problems which are in reality uncommonly complex.

As I see it, this crisis differs in character from past crises in that it is based on an entirely new set of conditions, due to rapid progress in methods of
production. Only a fraction of the available human labour in the world is
needed for the production of the total amount of consumption-goods
necessary to life. Under a completely free economic system this fact is bound
to lead to unemployment. For reasons which I do not propose to analyse
here, the majority of people are compelled to work for the minimum wage on
which life can be supported. If two factories produce the same sort of goods,
other things being equal, that one will be able to produce them more cheaply
which employs less workmen--i.e., makes the individual worker work as long
and as hard as human nature permits. From this it follows inevitably that, with
methods of production what they are to-day, only a portion of the available
labour can be used. While unreasonable demands are made on this portion,
the remainder is automatically excluded from the process of production. This
leads to a fall in sales and profits. Businesses go smash, which further
increases unemployment and diminishes confidence in industrial concerns and
therewith public participation in these mediating banks; finally the banks
become insolvent through the sudden withdrawal of deposits and the wheels
of industry therewith come to a complete standstill.

The crisis has also been attributed to other causes which we will now
consider.

(1) Over-production. We have to distinguish between two things here--real over-production and apparent over-production. By real overproduction I mean a production so great that it exceeds the demand. This m4y perhaps apply to motor-cars and wheat in the United States at the present moment, although even that is doubtful. By "over-production" people usually mean a condition of things in which more of one particular article is produced than can, in existing circumstances, be sold, in spite of a shortage of consumption-goods among consumers. This condition of things I call apparent over-production. In this case it is not the demand that is lacking but the consumers' purchasing-power. Such apparent over-production is only another word for a crisis, and therefore cannot serve as an explanation of the latter; hence people who try to make over-production responsible for the crisis are merely juggling with words.

(2) Reparations. The obligation to pay reparations lies heavy on the debtor nations and their industries, compels them to go in for dumping, and so harms the creditor nations too This is beyond dispute. But the appearance of the crisis in the United States, in spite of the high tariff-wall protecting them,
proves that this cannot be the principal cause of the world crisis. The shortage of gold in the debtor countries due to reparations can at most serve as an argument for putting an end to these payments; it cannot be dragged in as an explanation of the world crisis.

(3) Erection of near tariff-walls. Increase in the unproductive burden of
armaments. Political in security owing to latent danger of war. All these things
add considerably to the troubles of Europe, but do not materially affect
America. The appearance of the crisis in America shows that they cannot be
its principal causes.

(4) The dropping-out of the two Powers, China and Russia. This blow to world trade also does not touch America very nearly, and therefore cannot be a principal cause of the crisis.(Well, I cannot say anything for Russia, but for China, I think he underestimated something)

(5) The economic rise of the lower classes since the War. This, supposing it to be a reality, could only produce a scarcity of goods, not an excessive supply.

I will not weary the reader by enumerating further contentions which do not
seem to me to get to the heart of the matter. Of one thing I feel certain: this
same technical progress which, in itself, might relieve mankind of a great part
of the labour necessary to its subsistence, is the main cause of our present
troubles. Hence there are those who would in all seriousness forbid the
introduction of technical improvements. This is obviously absurd. But how can
we find a more rational way out of our dilemma?

If we could somehow manage to prevent the purchasing-power of the
masses, measured in terms of goods, from sinking below a certain minimum, stoppages in the industrial cycle such as we are experiencing to-day would be
rendered impossible.

The logically simplest but also most daring method of achieving this is a
completely planned economy, in which consumption-goods are produced and
distributed by the community. That, in essentials, is what is being attempted in
Russia to-day. Much will depend on what results this mighty experiment
produces. To hazard a prophecy here would be presumption. Can goods be
produced as economically under such a system as under one which leaves
more freedom to individual enterprise? Can this system maintain itself at all
without the terror that has so far accompanied it, which none of us
"westerners" would care to let himself in for? Does not such a rigid,
centralized system tend towards protection and hostility to advantageous
innovations? We must take care, however, not to allow these suspicions to
become prejudices which prevent us from forming an objective judgment.

My personal opinion is that those methods are preferable which respect
existing traditions and habits so far as that is in any way compatible with the
end in view. Nor do I believe that a sudden transference of the control of
industry to the hands of the public would be beneficial from the point of view
of production; private enterprise should be left its sphere of activity, in so far
as it has not already been eliminated by industry itself in the form of
cartelization.

There are, however, two respects in which this economic freedom ought to be limited. In each branch of industry the number of working hours per week
ought so to be reduced by law that unemployment is systematically abolished.
At the same time minimum wages must be fixed in such a way that the
purchasing power of the workers keeps pace with production.

Further, in those industries which have become monopolistic in character
through organization on the part of the producers, prices must be controlled
by the State in order to keep the creation of new capital within reasonable
bounds and prevent the artificial strangling of production and consumption.

In this way it might perhaps be possible to establish a proper balance between production and consumption without too great a limitation of free enterprise, and at the same time to stop the intolerable tyranny of the owners of the means of production (land, machinery) over the wage-earners, in the widest sense of the term.


Culture and Prosperity

If one would estimate the damage done by the great political catastrophe to
the development of human civilization, one must remember that culture in its
higher forms is a delicate plant which depends on a complicated set of
conditions and is wont to flourish only in a few places at any given time. For it to blossom there is needed, first of all, a certain degree of prosperity, which
enables a fraction of the population to work at things not directly necessary to the maintenance of life; secondly, a moral tradition of respect for cultural
values and achievements, in virtue of which this class is provided with the
means of living by the other classes, those who provide the immediate
necessities of life.

During the past century Germany has been one of the countries in which both
conditions were fulfilled. The prosperity was, taken as a whole, modest but
sufficient; the tradition of respect for culture vigorous. On this basis the
German nation has brought forth fruits of culture which form an integral part of the development of the modern world. The tradition, in the main, still stands; the prosperity is gone. The industries of the country have been cut off almost completely from the sources of raw materials on which the existence of the industrial part of the population was based. The surplus necessary to support the intellectual worker has suddenly ceased to exist. With it the tradition which depends on it will inevitably collapse also, and a fruitful nursery of culture turn to wilderness.The human race, in so far as it sets a value on culture, has an interest in preventing such impoverishment. It will give what help it can in the immediate crisis and reawaken that higher community of feeling, now thrust into the background by national egotism, for which human values have a validity independent of politics and frontiers. It will then procure for every nation conditions of work under which it can exist and under which it can bring forth fruits of culture.


Production and Purchasing Power

I do not believe that the remedy for our present difficulties lies in a knowledge
of productive capacity and consumption, because this knowledge is likely, in
the main, to come too late. Moreover the trouble in Germany seems to me to
be not hypertrophy of the machinery of production but deficient purchasing
power in a large section of the population, which has been cast out of the
productive process through rationalization.

The gold standard has, in my opinion, the serious disadvantage that a shortage in the supply of gold automatically leads to a contraction of credit and also of the amount of currency in circulation, to which contraction prices and wages cannot adjust themselves sufficiently quickly. The natural remedies for our troubles are, in my opinion, as follows:--

(1) A statutory reduction of working hours, graduated for each department of industry, in order to get rid of unemployment, combined with the fixing of minimum wages for the purpose of adjusting the purchasing-power of the masses to the amount of goods available.

(2) Control of the amount of money in circulation and of the volume of credit in such a way as to keep the price-level steady, all special protection being abolished.

(3) Statutory limitation of prices for such articles as have been practically withdrawn from free competition by monopolies or the formation of cartels.


Production and Work

An answer to Cederström

Dear Herr Cederström,

Thank you for sending me your proposals, which interest me
very much. Having myself given so much thought to this subject I
feel that it is right that I should give you my perfectly frank
opinion on them.

The fundamental trouble seems to me to be the almost unlimited
freedom of the labour market combined with extraordinary
progress in the methods of production. To satisfy the needs of
the world to-day nothing like all the available labour is wanted.
The result is unemployment and excessive competition among
the workers, both of which reduce purchasing power and put
the whole economic system intolerably out of gear.

I know Liberal economists maintain that every economy in
labour is counterbalanced by an increase in demand. But, to
begin with, I don't believe it, and even if it were true, the
above-mentioned factors would always operate to force the
standard of living of a large portion of the human race doom to
an unnaturally low level.

I also share your conviction that steps absolutely must be taken to make it possible and necessary for the younger people to take
part in the productive process. Further, that the older people
ought to be excluded from certain sorts of work (which I call
"unqualified" work), receiving instead a certain income, as having
by that time done enough work of a kind accepted by society as
productive.

I too am in favour of abolishing large cities, but not of settling
people of a particular type--e.g., old people--in particular
towns. Frankly, the idea strikes me as horrible. I am also of
opinion that fluctuations in the value of money must be avoided,
by substituting for the gold standard a standard based on certain
classes of goods selected according to the conditions of
consumption--as Keynes, if I am not mistaken, long ago
proposed. With the introduction of this system one might
consent to a certain amount of "inflation," as compared with the
present monetary situation, if one could believe that the State
would really make a rational use of the windfall thus accruing to
it.

The weaknesses of your plan lie, so it seems to me, in the sphere
of psychology, or rather, in your neglect of it. It is no accident
that capitalism has brought with it progress not merely in
production but also in knowledge. Egoism and competition are,
alas, stronger forces than public spirit and sense of duty. In
Russia, they say, it is impossible to get a decent piece of
bread.…Perhaps I am over-pessimistic concerning State
and other forms of communal enterprise, but I expect little good
from them. Bureaucracy is the death of all sound work. I have
seen and experienced too many dreadful warnings, even in
comparatively model Switzerland.

I am inclined to the view that the State can only be of real use to
industry as a limiting and regulative force. It must see to it that
competition among the workers is kept within healthy limits, that
all children are given a chance to develop soundly, and that
wages are high enough for the goods produced to be consumed.
But it can exert a decisive influence through its regulative function
if--and there again you are right--its measures are framed in an
objective spirit by independent experts.

I would like to write to you at greater length, but cannot find the
time.